COMMODITIES 2025: North Sea companies scale up to stay alive, or leave

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

Weak prices, a mature basin, and energy transition pressures are driving consolidation in Europe's North Sea oil and gas sector, with a dwindling number of independents struggling to make their mark in a less favorable environment, according to analysts.

The last year for the upstream industry has been defined in the UK by the switch to a Labour government skeptical of the sector and keen to ramp up taxes. This has led some companies to step back. Houston-based APA Corp -- formerly Apache -- has declared an end to new investment, Japan Petroleum Exploration has warned it may exit the newly producing Seagull project, Harbour Energy has curbed its spending, and significant projects have been put on hold, including Neo Energy's 100 million barrel Buchan redevelopment project.

Others are looking to bulk up. Independent Ithaca Energy has combined its UK assets with those of Italy's Eni, and Serica Energy has continued a run of acquisitions on the back of revenues derived in the 2022 energy crisis.

The defensive nature of many of these moves is evident in Shell and Equinor's December decision to combine their UK businesses in an arm's-length venture that will stand or fall on its own financing, according to Chris Wheaton, research analyst at investment bank Stifel.

Equinor had been struggling to sell part of its 80% stake in the 350 million barrel Rosebank project, due on stream in 2026-27. It will now instead spread its risk exposure across a broader portfolio. Shell is slimming down its contribution meanwhile, with a separate sale of gas assets to Viaro Energy. Both companies promise the new venture will be "more agile, focused, cost-competitive and strategically well-positioned," with Shell upstream director Zoe Yujnovich adding it will "play a critical role in a balanced energy transition."

But Wheaton said the deal was about managing punitive taxation, arguing it brings few genuine synergies and relies heavily on Rosebank being delivered successfully and on time -- even though Shell is contributing several smaller projects also due on stream.

"The only thing [Shell and Equinor] can do together that they could not do separately is pay less tax," Wheaton told S&P Global Commodity Insights, referring to tax losses accumulated by Shell that can be used to offset the joint venture's future tax payments. The government needs to "wake up to the fact that the tax rate is egregiously and punitively high," he added.

Big-company dominance

Against this backdrop, further decline in UK oil and gas output seems likely, particularly given a government policy of not issuing new licenses. Flows of remaining Brent Blend crude have dropped sharply as late-life fields have closed; the blend remains a component in Commodity Insights' Dated Brent benchmark, but has been supplemented with other grades including US WTI Midland.

Commodity Insights analysts expect some slowing in the rate of UK crude output decline as projects such as Shell's Penguins start up. UK crude output was down 10% year-on-year in January-September. But UK gas output decline could start to accelerate, industry group Offshore Energies UK has warned.

For Mike Lakin, managing director of exploration marketing company Envoi, the challenge for the Shell-Equinor tie-up is one faced by the sector as a whole: can it support expertise and innovation in an industry dominated by major companies, many of which -- he argued -- have shed vital talent in the drive to energy transition. Lakin sees some renewed interest in oil and gas investment, particularly among private companies, as reliance on renewables is being questioned, but he warned of a need to support the mostly unsung independents that are often behind major discoveries -- as well as, in the UK, eking out late life production.

While the majors are vital to the appraisal and development of resources, "let's not forget that many of the world's big discoveries have historically come from smaller company ideas," Lakin said. "The smaller companies have an equally important place in a successful upstream ecosystem."

Production goliaths

Consolidation and concern about the fate of smaller companies is not confined to the UK. Norway -- now Europe's primary source of home-grown oil and gas -- has seen a growing dominance by large and mid-sized players such as Equinor, Var Energi and Aker-BP, following the takeover or exit of the likes of Faroe Petroleum, Lundin Petroleum, Det Norske Oljeselskap and Longboat Energy.

"Structural changes... have favoured an increasingly small group of very large companies with long-term investment horizons and access to low cost of capital," Longboat said in announcing its departure to focus on Southeast Asia in June. It added it had been "left at a significant competitive disadvantage."

However, for the time being, Equinor, Var Energi and Aker BP are spearheading a push to unlock more oil and gas in the Barents Sea, despite heavy criticism over safety breaches that accompanied the first Barents Sea oil development, Goliat, led by Var's parent company, Italy's Eni. And Norway's industry continues to enjoy a production boom stemming from the giant Johan Sverdrup field, on stream since 2019 and now responsible for a quarter of North Sea oil output.

While Sverdrup is forecast to start declining soon, another boost is due from Equinor's Johan Castberg field, the second, long-delayed Barents Sea oil development, due on stream in early-2025.

Torgeir Stordal, director general of the Norwegian Offshore Directorate, argued in August that smaller companies lacked the financing to convert new discoveries to commercial projects, and implied the likes of Aker BP and Var were the right companies to open up the Barents Sea.

Amid harsher lending conditions, "there absolutely is a economics of scale issue here," Teodor Sveen-Nilsen, equity research analyst at SpareBank 1 Markets, said.